One Regulatory Size Does Not Fit All: Editor/Publisher's Column

I’m going to share with you excerpts from a report that was sent to the Consumer Financial Protection Bureau explaining why it should practice an asset size-based exemption for its regulations. The executive summary opens:

This paper contends the Consumer Financial Protection Bureau (CFPB) should exempt or provide targeted compliance requirements for small federally insured depository institutions based on asset-based thresholds. Without asset-based exemptions, the smallest and most vulnerable banks and credit unions, termed micro depository institutions (MDIs), are likely to exit critical product lines, become less financially sound and ultimately provide fewer services to customers and members. The use of asset-based exemptions for MDIs will not meaningfully disadvantage consumers.

The report continues on to mention that MDIs have “limited managerial and financial capacity” but may offer a wide variety of products and services that require them to check their compliance across the spectrum as opposed to larger, single-service financial providers.

“A broad array of services results in MDIs facing a large cumulative compliance burden,” the paper states. Yet, as defined in the paper, this group of financial institutions of less than $30 million in assets serves 1% of the consumer market share of financial institutions nationwide. Nearly all of these MDIs, 92%, are credit unions.

It also notes that the median annual earnings at these MDIs tallied $3,071, and nearly 42% of these institutions had negative earnings in 2011. Adding $40,000 to their compliance burden, which is well below the CFPB’s collection request for Reg Z amendments, would move that 42% to a whopping 72.5% of MDIs with negative earnings.

Setting aside the arguments that undoubtedly arise every time the value of micro-institutions comes up, the government and not the marketplace is creating safety and soundness concerns for this subset of institutions, in addition to the compliance burden on all institutions to regulate a few bad actors among the already regulated institutions and the previously unregulated brokers that contributed to the housing crisis.

In addition to the cost, compliance efforts will take away from time devoted to serving consumers. Moreover, many of these financial institutions are serving areas that would not otherwise be served.

A fine analysis for a trade group to submit, but it didn’t come from a trade association. This particular analysis was penned by the NCUA to the CFPB. Irony aside, it’s a real eye opener and demonstrates the primary federal regulator is aware of the issue of the cumulative effect of regulations on the credit union community.

Imagine the regulators’ savings if they did not have to ensure that more than 3,000 tiny little institutions serving just 1% of consumers were compliant with certain, or even certain parts of, CFPB regs. Or carefully selected NCUA regs for that matter.

Following its own advice, the NCUA raised the asset-size threshold for a small credit union to $50 million in assets as it relates to its regulations at last week’s board meeting. The move was long overdue and should be applauded as it will exempt these credit unions from the interest rate risk rule and risk-based capital rules as well as providing these credit unions access to assistance from the Office of Small Credit Union Initiatives.

I fully support consumers being protected from greedy financial institutions that are in business to take advantage of them, but first we need to look at the regulations already in place rather than layering on.

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” CFPB Director Richard Cordray said in the bureau’s announcement regarding it’s ability-to-repay standards.

For those that enjoy irony: Part of the safe harbor for a qualifying mortgage is that it be eligible for Fannie or Freddie to buy, despite the fact that those two haven’t seen a complete overhaul yet after their complicity in the mortgage crisis. But I digress.

I’m in 100% agreement. They also should not get whacked with the copious, ridiculously worded disclosures consumers face when they’re trying to perform a financial transaction.

One has to wonder whether the regulators have ever sat through a mortgage closing. Borrowers are presented with a two-inch high stack of mostly government-required documentation that very few bother to read, and even those that do attempt it go cross-eyed at the legalese. If every bit of information in that mammoth stack is important, then nothing is important.

Regulatory agencies in general need to strive for better transparency rather than more. One thing any writer should do is tailor his or her piece to the audience. A 1993 study by the Department of Education found that the average American reads on an eighth-grade level. Regulators should require that disclosures be written at that level and even provide sample disclosures as a safe harbor option for financial institutions.